Lending has been expanding quite rapidly in Vietnam in recent quarters. This was due to exceptionally loose monetary conditions (negative real interest rates on average in the past year), the high level of structural inflation (that stimulates indebtedness), the situation of ample domestic liquidity at the disposal of the banking sector and the necessity to keep spending plans relatively unaffected in the wake of the global economic slowdown.

However, the situation has severely deteriorated recently, as the State Bank of Vietnam (SBV) followed a policy of controlled depreciation of the Vietnam dong (VND) and the hoarding of US dollars (USD) by the private sector determined a situation of general shortage of liquidity, especially in USD, which has led to the current mobilisation measures. 

With the central bank acting on the VND and the interest rate and with the market speculating that this will not be the only adjustment made by SBV in 2010, the situation for banks is difficult as the hoarding of USD tends to persist and deposits fail to increase.

As said above, lending has been growing strongly, probably to an extent that has started to ring bells at the SBV. The interest rate increase last November was not only aimed at neutralising the inflationary effect of the VND depreciation but also to start a tightening phase in monetary policy that will lead to less credit. So a tightening in credit is by no means an “accident” but is the result of the start of a tightening cycle by the SBV aimed at fighting inflationary pressures that are already starting to surface. 

Attracting deposits with interest rate increases is a very difficult task for any central bank for a number of reasons. One might be the incomplete adjustment in deposit rates by banks following the SBV move. Others are related to the fact that normally to attract deposit a significant move in rates is needed. Furthermore, with expectations of further rate increases, the public might still remain on the sidelines. But I am sanguine that deposits will grow once the full extent of policy actions has been deployed.

What do you think of the outlook for mobilisation and lending activities in the coming months after the Tet holiday and during all of 2010? 

Credit will continue to slow down. The adjustment, both in rates and in the exchange rate, is probably not over yet and this will tend to depress borrowers. That said, I think this is a necessary development and once again due to the determination by the central bank to stem excessive lending. The deceleration in the economic activity - due to the credit slowdown - is an acceptable price to pay if inflation can be kept under control.

Foreign banks in Vietnam seem to have escaped the current difficulties. What do you think about foreign banks’ mobilisation and lending activities at the moment, especially those of HSBC, Standard Chartered and ANZ? 

Foreign banks play their role like any other bank and this is good. The theory of foreign bank presence in a host country is rather controversial as far as the net benefits for the hosting market, especially if the latter is an emerging economy.

The benefits of foreign banks’ presence are plentiful. First is increased competition in the banking sector of the host country. Stronger competition leads to an overall enhancement in the efficiency of financial services and a reduction of interest rate spreads (lending-deposits). Moreover, the entry of generally very sophisticated banks increases financial awareness of emerging markets residents. Also, foreign banks may contribute to stabilising the economy and the financial sector of the host country as they are generally immune to asymmetric shocks happening to hit the host country and not the country where the headquarters of the banks are located. As such the whole banking sector is less dependent on the domestic economic business cycle. 

The problems with foreign presence are mostly related to the possibility of “cut and run” behaviour, a situation in which foreign banks abruptly leave the country at very difficult times, refusing to play their stabilising role. This was typically the case in the Argentinean crisis. Foreign banks accounted for more than 50 per cent of total bank assets in the country on the eve of the crisis. The number of branches of foreign entities soared to 1,535 and then to 1,863 in 1998 and 2000. There were 390 in 1994. As shown in many studies on the crisis, several foreign banks chose to leave the market and huge losses for the remaining banks induced the foreclosure of operations in other countries.

It appears clear therefore that foreign banks are fully playing their role in Vietnam and this is why I said above that this is “good”. 

I am afraid that there is nothing that can be done at the moment, and I really think that it is wise from the side of the central bank to try to decelerate credit without neglecting the provision of an appropriate amount of liquidity in the banking sector that is crucial for the functioning of the interbank market. As such, domestic investment will react to the ongoing monetary policy tightening cycle with a slowdown in spending that will ultimately hurt economic activity. But once again I think that this is the price to be paid in order to neutralise inflationary pressures; the return of sky-high inflation will definitely be a worse evil. 

What do you recommend the SBV and authorities do to deal with the situation? 

The SBV is handling the current situation reasonably well. It was criticised back in November because it actually devalued the VND and raised interest rates some weeks after senior officials rejected the possibility. But being the central bank is no easy job!

What is important is that the SBV correctly identified the risk of higher inflation and reacted pre-emptively and will continue to do all that is needed to prevent double digit inflation resurfacing. I have full confidence in the SBV. I know several smart and talented officials there who are perfectly capable of addressing the current situation handsomely. I am fully convinced that the central bank and other institutions will be successful in leading the Vietnamese economy to express is full, strong potential and provide the Vietnamese people with the prosperity they deserve.